Amalgamation & demerger norms set to be relaxed

The government is considering major relaxations in the amalgamation and demerger norms in the form of tax benefits to give a fillip to corporate restructuring in the forthcoming Budget.

The relaxations include reduction in the stipulated amount of assets to be retained by the amalgamated company and the period for which the business of the amalgamating company would have to be continued.

Finance ministry sources said that finance minister Yashwant Sinha had already indicated that to allow the industry to become competitive to face the challenges of globalisation, corporate restructuring norms needed to be relaxed.

They added that Central Board of Direct Taxes (CBDT) had listed all the proposals in this regard coming from the industry and other sources, and the suggestions which would emerge as being considered major impediments in corporate restructuring, were expected to get a nod from the government in the Budget.

Sources said that industry demand that the amalgamated company should be allowed to retain only 50 per cent and not 75 per cent of the value of the assets of the amalgamating company to facilitate prudent utilisation of the remaining assets of the amalgamating company, was one such proposal.

Another industry suggestion falling in this category was to facilitate revival of the business of amalgamating company, the amalgamated company should be allowed the option to change the line of manufacturing activity as per the business needs, they said.

The federation of Indian chambers of commerce and industry (Ficci) in its pre-Budget memorandum has demanded that the stipulated limit of five years in this regard should be reduced to two years. A senior official said that any such reduction would be done keeping in mind that there should be simultaneous provisions to stop trading of losses.

In case of demergers, Ficci has pointed out that the definition of demerger inserted in Section 2(19AA) of the Income Tax Act outlining the requirements concerning transfer of property and the liabilities, unduly restricted the scope of demerger.

The same should also be permitted through the approval of shareholders under Section 293(1)(a) of the Companies Act, the apex industry chamber has said.

Ficci has further suggested that only those liabilities relatable to the undertaking which were mutually agreed upon, should be required to be transferred. Alternatively, the resulting company should be allowed to create an equivalent liability towards the demerged company for the retained liabilities in order to meet the condition, it said.

Sources said that a final view on these recommendations would be taken during the discussions on the tax proposals to be introduced in the Budget.

The basic objective of the changes would be to provide a decent exit route for the industry by providing tax benefits on reasonable grounds, they said.